Stablecoins and Tokenization in India

 

A Dynamic Landscape

The financial world is undergoing a significant transformation, with traditional finance intersecting with crypto technology. Stablecoins, designed to maintain a stable value by being pegged to fiat currencies or commodities, are emerging as potential tools for value transfer, settlement, and liquidity management. Parallel to this, tokenization, particularly of stocks, presents a vast market opportunity with global accessibility and fractional ownership. However, India is navigating this evolution with caution and its own strategic initiatives.

Tokenization: The Dawn of a Parallel Market?

The evolution of finance, where traditional systems meet crypto technology, compels us to consider the implications of owning a stock-token. Traditionally, a company is viewed as a single entity, with shareholders owning parts of it, trading on specific exchanges at fixed timings. With the advent of crypto, we might soon see a single share unit tokenized, allowing its token holders to own fractions, traded anytime, anywhere, with anyone. This paradigm shift could usher in a parallel market altogether, offering unparalleled flexibility. Imagine owning a part of any share listed globally and trading it at any time from anywhere, all managed from your crypto-wallet.

Currently, India's Depositories Act and SEBI LODR regulations do not permit fractional ownership of a share in its traditional form. This regulatory gap is precisely what a Bengaluru-based startup like Xaults is exploring. While Xaults primarily focuses on deep-tier supply chain financing and programmable CBDC solutions, their work in leveraging DLT and smart contracts hints at the broader potential for tokenization to innovate financial instruments. The prospect of multiple individuals jointly owning a fraction of a high-value share, like Asian Paints or Nvidia , and trading it around the clock, while enjoying economic benefits like dividends with minimal paperwork, forex charges, and regulatory red tape (excluding voting rights, which remain legally tied to shareholders), is truly transformative.

However, trading tokens through decentralized blockchain frameworks, which can be anonymous and remove the need for a traditional broker, introduces complexities. While this could mean a few hold physical shares and thousands hold tokens, potentially making token markets influential due to their lower barriers and extended trading hours, significant challenges remain for brokers. Price discovery, liquidity, and settlement are still major question marks for tokenized stocks, especially given their 24/7 trading potential, including weekends. This could lead to wide spreads and synthetic pricing during off-market hours, exposing investors to substantial manipulation risks.

Despite these hurdles, the global picture is evolving rapidly. Regulators and brokers are actively examining tokenized stock markets and equity offerings, with many establishing sandboxes for trading and settling tokenized financial instruments. As Robinhood CEO Vladimir Tenev suggests, tokenization can bring impact and real value by injecting liquidity into private markets and offering retail investors exposure to groundbreaking innovations often overlooked by traditional investors.

Remittances: A Stablecoin Solution?

India remains the world's largest remittance market, having received a record $135.46 billion in FY2024-25 according to RBI data, with $129.4 billion in 2024 alone. Despite these massive inflows, the cost of transferring money from overseas remains high, estimated at $3.72–$8.68 billion annually in fees and charges.

Can stablecoins revolutionize this? They offer the potential to make remittances 3-4% cheaper, with transaction charges being nearly negligible. This is because stablecoins bypass numerous traditional intermediaries and their associated fees (brokerage, exchange, depository, compliance) with only minimal network fees. However, a significant hurdle in India is that stablecoins are currently classified and taxed as cryptocurrencies, hindering their widespread adoption for remittances. While stablecoins offer a clear cost advantage, the fundamental role of banks in converting crypto to fiat (USD to INR, for instance) ensures their continued relevance. Cross-border payments are inherently susceptible to exchange rate fluctuations, directly impacting transaction value and business cash flow. This underscores the importance of SDG 10.C, which targets reducing remittance transaction costs to less than 3% by 2030. The global average, however, stood at 6.65% in Q2 2024.

Why Stablecoins Face Resistance in India

The Indian government, particularly the Reserve Bank of India (RBI), views stablecoins with significant apprehension, considering them a potential "existential threat" to policy sovereignty. This stems from two primary concerns, firstly displacement of the Rupee where If large stablecoins pegged to foreign currencies were to dominate, they could potentially replace the Indian Rupee in the local economy, undermining monetary control. Secondly decentralized threat to CBDCs where stablecoins issued by private entities operate on decentralized blockchains, accessible to anyone with an internet connection, bypassing traditional banking systems. This stands in stark contrast to central bank digital currencies (CBDCs), like India's Digital Rupee, which are limited to specific networks and controlled by the central bank, thus posing a direct competitive threat.

Project Nexus: India's Strategic Answer

Despite the skepticism towards private stablecoins, India is actively forging its own path to facilitate cross-border transactions and reduce remittance costs. This is exemplified by Project Nexus, an initiative by the BIS Innovation Hub. India, along with Malaysia, the Philippines, Singapore, and Thailand, are founding members, with Indonesia joining as a special observer.

Project Nexus is designed to standardize the interlinking of Instant Payment Systems (IPS) globally. Instead of needing custom connections for each new country, a payment system operator can make a single connection to the Nexus platform, instantly reaching all other countries on the network. This multilateral approach could significantly accelerate the growth of instant cross-border payments, allowing transactions to settle within 60 seconds in most cases.

With Project Nexus advancing (its Phase 3 report was published in July 2024, outlining a path to "real-life" implementation), the UPI-RuPay-Nexus triad is poised to transform cross-border payments for India. Imagine sending a UPI payment to someone in Singapore, settled via the Bank for International Settlements (BIS), and credited to the receiver's domestic account in seconds.

Whether Project Nexus will truly make a significant dent in cross-border transaction costs and become a universally accepted platform for global settlement is a question that will unfold as it takes shape in the near future. Until then, whether stablecoins are a lasting innovation or merely a passing trend, only time will tell.